AMERICAS NEWS: Financing under threat

In recent years, a US visa program called EB-5 has increasingly been utilized by real estate developers for early-stage financing of development projects. But now this capital source is under threat by a bill that was recently introduced by Senators Patrick Leahy and Chuck Grassley in Congress.

Though the EB-5 Regional Center Pilot Program was first authorized in 1993, streamlined processes have resulted in significant volumes of applications being made in recent years, coinciding with real estate developers – including some private equity real estate firms – using this fresh source of capital as a way of financing their developments. This is especially the case for operating real estate sectors such as hospitality, healthcare, and assisted living.

The EB-5 program offers permanent residency to foreign entrepreneurs if they invest in a relevant commercial enterprise with a plan to create or preserve 10 permanent full-time jobs for qualified US workers. Chinese investors have been such heavy users of the program that they now account for 80 percent of the visa applications. In fact, they have had retrogression applied against them, meaning any applicants after June 2013 have to wait for more visas to become available before their conditional residence can commence.

Adam Salis, a lawyer at Manatt, Phelps & Phillips, said private equity professionals have become more and more interested in the program since they view EB-5 as a cheap source of capital compared to other options. Salis, who advises real estate developers and banks in negotiating, documenting and obtaining EB-5 bridge loans, noted that some banks have been busy figuring out how to bridge a time gap between foreign nationals applying for permanent residency under the scheme and gaining approval from the US Citizen and Immigration Service (CIS) which can take 12 months to 18 months. Some banks – mainly local lenders but also global institutions such as Citibank – were using EB-5 money held in escrow accounts as security for bridge finance loans that were made to developers, he explained. Typically, a bank might issue a loan of 50 percent to 60 percent of the balance held in escrow.

EB-5 financing has been used by high-profile firms such as New York-based Related Companies for its $20 billion Hudson Yards development in Manhattan. “There are large institutional projects all over this country that have a history of using EB-5,” Salis said.

However, with EB-5 up for reauthorization this month, there is a perceived threat coming from Senate Judiciary Committee Ranking Member Leahy and committee chairman Grassley. In June, the pair proposed bipartisan legislation designed to extend the EB-5 program, but detractors fear that some of the proposed changes in the legislation could curb the program’s current use as a form of real estate financing.

Leahy said in a statement earlier this year that in many instances the program had helped to reinvigorate a sluggish US economy. But he added: “At the same time, though, we’ve seen too many occasions where national security has been put at risk and job creation has taken a back seat. Our bill strengthens oversight, ensures greater accountability and transparency, discourages fraud, and provides a higher priority for national security.”

One proposed change revises the definition of ‘targeted employment area,’ with the aim of driving more investment to areas with high unemployment as well as rural areas. Another goal is to raise the minimum investment threshold from $500,000 to $800,000 for targeted employment areas and $1.2 million for non-targeted employment areas.

Detractors said this could turn off foreign investors. “The Leahy-Grassley bill will put at risk many urban projects in terms of EB-5 financing,” said Salis. “Right now there is a vacuum of knowledge about what to do with a project because no one knows what this final law will look like. The Leahy-Grassley proposals are extreme and in some areas could almost eliminate EB-5 as an option.”

Plenty of folks are watching to see what will happen, but at the moment few private equity real estate firms are discussing the matter publicly. When approached by PERE, a spokeswoman for Related Companies declined to comment, saying the issue had become a “hot political potato.”